Investors face a deadline for fossil fuel financing, according to SBTi, as prominent oil companies withdraw their support for such investments.
The Science Based Targets Initiative (SBTi) has published new standards on its website, calling for a significant shift in the financing of fossil fuel projects. The new guidelines aim to address the complex question of how investors should respond to fossil fuel expansion, and they have been welcomed by environmental advocates as a crucial step towards meeting the decarbonisation targets set out in the Paris Agreement.
For the past four years, the International Energy Agency (IEA) has warned that no new oil and gas capacity is needed to meet these targets. Despite this, resources from new oil and gas fields planned for approval between 2026 and 2030 could amount to 200 billion barrels, equivalent to 3.6 times global production in 2023.
In response, the SBTi is calling for an immediate end to financing fossil fuel expansion project finance and the phasing out of general-purpose finance for oil and gas expansion by 2030. This standard, effective from January 2027 after an 18-month transition, is voluntary but influential in guiding institutions towards net-zero by 2050.
Financial institutions must immediately stop project finance explicitly linked to fossil fuel expansion, including coal. For companies expanding coal operations, general-purpose finance must end immediately; for oil and gas expansion, there is a phase-out deadline by 2030. The new standard separates immediate cessation of project-specific finance from a slightly longer timeline for general-purpose financing tied to oil and gas upstream expansion.
Institutions are also required to publish transition strategies for their energy-related portfolio and set science-based targets aligned with a 1.5°C pathway. The SBTi emphasises an "engagement first" approach, encouraging institutions to influence companies towards decarbonisation before resorting to divestment if efforts fail.
However, concerns about the 2030 deadline for phasing out general-purpose financing involve the practical challenges for financial institutions in withdrawing from financing companies engaged in oil and gas expansion. The deadline may be viewed as ambitious given the scale and complexity of fossil fuel financing and the need for credible transition pathways. Some have raised questions about the real-world impact of these rules given the voluntary nature of adoption and enforcement limitations.
Despite these concerns, the new standards represent a significant step towards aligning the financial sector with the goals of the Paris Agreement. The updated SBTi framework expands asset class coverage, improves transparency of emissions inventories, and offers guidance on decarbonising the built environment.
The new battleground is emerging in the financial services industry, with banks, insurers, and institutional investors under increasing pressure to stop insuring, underwriting, and investing in new fossil fuel production. The Sierra Club's Sustainable Finance campaign's policy adviser, Jessye Waxman, has welcomed the new SBTi guidelines, stating they clarify what constitutes credible net-zero plans for financial institutions. Waxman emphasised the importance of global financial institutions adopting this standard and aligning their strategies accordingly.
Some of the world's largest oil majors, such as Shell Plc, Aker BP ASA, and Enbridge Inc, have withdrawn from the expert advisory group at SBTi due to the fossil fuel phase-out being incompatible with their core business. This withdrawal highlights the challenges faced by the financial sector in transitioning away from fossil fuels, but it also underscores the urgency of the situation.
In conclusion, the SBTi’s current stance is to impose strong science-based restrictions on fossil fuel financing, with an immediate end to project finance and a 2030 deadline for phasing out broader general-purpose financing for oil and gas expansion. The balance of immediacy and phased deadlines reflects the complexity of transitioning finance away from fossil fuels, while striving for alignment with global climate goals.
- The Science Based Targets Initiative (SBTi) has issued new standards, urging financial institutions to phase out general-purpose financing for oil and gas expansion by 2030, as part of an effort to align the financial sector with the goals of the Paris Agreement.
- The updated SBTi framework, which includes guidelines for the decarbonisation of the built environment and improved transparency of emissions inventories, represents a significant step towards ending fossil fuel financing, particularly in the face of concerns about climate change and environmental degradation.
